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Capital goods sector sees steady momentum as capex cycle strengthens

India’s industrials, defence and railways ecosystem delivered a broadly resilient performance in Q3FY26, supported by steady order inflows and stable profitability despite slightly slower execution. Across leading sector players, revenues grew 11 per cent year-on-year, below expectations due to delayed project execution in select engineering and EPC segments, while profitability remained healthy, reflecting operating leverage and improved project mix. Sector margins expanded nearly 70 basis points year-on-year to 13.1 per cent, demonstrating resilience even amid commodity price volatility. 

The sector’s outlook remains anchored in rising public capital expenditure and sustained investments across defence, renewables, transmission and data centre infrastructure. Government capital spending is set to grow 11 per cent in FY27, with defence allocations rising sharply, creating strong visibility for future order conversions. Ordering momentum during the quarter remained healthy across transmission and distribution, renewables, real estate, and international EPC markets, although private sector capex continues to recover selectively across metals, automobiles and cement. 

Exports have emerged as an improving growth lever following recent trade agreements with major global markets, easing earlier uncertainties around tariffs and order finalisations. Companies are increasingly aligning capacity expansions toward export demand, particularly in transformers, industrial equipment and defence manufacturing. Defence exports are also expected to gain traction over the medium term, supported by policy push and rising global demand, although execution timelines remain long. 

Structural shifts are becoming more visible, with investments accelerating in grid expansion, power equipment, rail manufacturing and data centre infrastructure. Proposed long-term policy incentives for data centres and rising electrification needs are driving capacity additions, largely funded through internal accruals, indicating balance sheet discipline alongside growth ambitions. Meanwhile, competitive pressures from overseas suppliers remain limited in the near term due to regulatory barriers and capacity constraints abroad. 

Key risks to monitor include commodity price movements, the pace of tender finalisation under higher budget allocations, and a broader revival in private capex. Nevertheless, stable margins, improving export prospects, and sustained government-led investment underpin a constructive medium-term outlook. Companies demonstrating strong execution capabilities and pricing discipline are likely to be better positioned to benefit from the ongoing infrastructure and manufacturing investment cycle.

BEL - Target Price: ₹520

Supported by a robust ₹73,000 crore order book and sustained inflows, Bharat Electronics remains well placed to benefit from large platform programs across the Army, Navy, and Air Force. A strong addressable market underpins expectations of sustained revenue growth exceeding 15 per cent over coming years. Strong execution during Q3FY26 drove revenues and margins above expectations, aided by disciplined cost control and operating leverage. Effective supply-chain management has insulated the company from semiconductor shortages and commodity volatility, while higher indigenisation levels continue to support better-than-expected profitability. Looking ahead, Bharat Electronics is positioned to capitalise on sizable orders including QRSAM, Akash-NG, next-generation corvettes, and base programs. Improved margins and healthy execution underpin management’s guidance, with revenue and PAT expected to grow at 18 per cent and 16 per cent CAGR over FY25-28.

Siemens Energy: Target Price: ₹3,600

Siemens Energy (ENRIN) is structurally positioned to benefit from India’s power transmission capex cycle, supported by a sharp rise in transformation capacity needs and a strong export opportunity. Capacity additions in transformers and high-voltage switchgear enhance its ability to address both domestic and global demand. Management notes that any entry by Chinese players would require local capacity setup and certifications, limiting immediate industry disruption. In Q3FY26, Revenue grew 26 per cent Y-o-Y, while Ebitda margin expanded 200bp Y-o-Y to 24.1 per cent, aided by lower other expenses. Strong margins and higher other income led to 57 per cent Y-o-Y PAT growth. Order backlog rose 38 per cent Y-o-Y, providing healthy revenue visibility. With capacity expansions coming on stream by FY27, operating leverage and export mix should support profitability. We expect revenue/Ebitda/PAT CAGR of 27 per cent/30 per cent/32 per cent over FY25-28E, led by robust transmission growth and steady generation recovery. 

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  (Disclaimer: This article is by Motilal Oswal Financial Services Research Desk. Views expressed are their own. )